Emotions and decision making

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Specific emotions influence our decision making. This is an effect of positive and negative moods. Good mood increases reliance on heuristics and results in more biased judgements. Bad mood trigger more deliberate (System 2) thought processes that can reduce biases in judgements.

Nevertheless, this is not always true. Negative moods may have heuristic effect too. For example: sad people are more affected by anchors and make worse decisions as a result.

Researchers identified a small set of basic emotions. For instance: happiness, sadness, fear, disgusts and anger. Each emotion activates a set of feelings and “appraisal” tendencies that prepare us to respond to the world in a certain way.

For example: fear makes our mind sensitive and prepares for a flight. Disgust focuses attention on physical contaminating agents. Sadness focuses attention on self and motivates to seek change. Anger is an interesting one. Although it is a negative emotion it shares many features with happiness including increased confidence, feeling of power and decreased sensitivity to risk.

Endowment effect

Each emotion can influence our judgement. Emotional state can have a significant effect on the nature of endowment effect (we place a greater value on a commodity if we own it). For instance: disgust lead people to be willing to sell at lower price and lead potential buyers to lower how much they would be willing to pay. Sadness triggers the goal to change one’s circumstances, increasing willingness to buy and decreasing the price they demanded to sell.

Perception of Risk

Emotions are associated with perceptions of risk. Happy people tend to be more optimistic and sad people – more pessimistic. Fear and anxiety create risk averse behaviour. Angry people are willing to endure risk and appear quite optimistic with respect to risk. They think they are less suspect able to a wide variety go career and health risks.

Regret avoidance

Researchers investigated people’s anticipation to regret. Assume one wins a silver medal instead of gold one. An individual almost won a gold metal thus he feels regret. Interestingly, bronze medal winners appears happier on pictures because they are simply happy to be medalists.

Motivation to minimise the opportunity for regret can lead people to make decisions that are suboptimal to actual outcomes. Decision makers distort their decisions to avoid negative feedback. How do they do this?

  1. Individuals choose an option that shield them from feedback on foregone alternatives
  2. When feedback on the not-chosen-decision is inevitable, they make choices that are likely to compare favourably to forgone options. Individuals compare relative value of outcomes to the pain of regret.

Mood congruent recall

Depressed people report they cannot remember what it felt like to be happy. Similarly, happy people have trouble recalling how they felt during more difficult times. For instance: a happy boss will find it easier to recall times when you performed well and is also more likely yo feel optimistic about the company’s ability to afford a raise for you. The weather can also influence people’s moods in ways that affect their perceptions. For instance: cloudy days are much less satisfying.

In general, we are better at remembering information consistent with our state of mind than information inconsistent with it.

Tips to limit negative effects of emotional decision making

People are typically unaware of the influences of their emotions on their decisions. Emotion can bias our judgements. However, even if we cannot stop ourselves from feeling, we may be able to limit the negative effects of our emotions on the quality of our decisions.

  1. Labelling emotions. In order to neutralise the negative impact of our emotions on decisions, we must begin by identifying our emotions and their sources. Labelling our emotions is an effective way to eliminate emotion manipulation. Unpleasant emotions are effectively neutralised by identifying source of emotion.
  2. Emotion verbalisation. Making decision makers accountable for their choices is another effective way to minimise emotion effects. One could justify decisions, learning to hold emotions in check and more toward more systematic, System 2 thinking. For instance: an individual could create accountability for himself i.e. report rationale for a decision to the boss or simply write down an explanation for a decision for himself. Accountability has the ability to reduce the likelihood of acting on emotions in ways that you will later regret. Thus, verbalisation can also neutralise emotions.
  3. Institutionalise controls on emotions. Society tends to allocate scarce resources to vivid concerns rather than issues where scarce resources do the most good. Vivid stories create emotional reactions. Institutionalising the use of logical decision making process would protect society from being overly influenced by temporary emotions.

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

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